Market Week Wrap-up

[TradetheNews]

- Equity indices ticked higher this week thanks to mostly positive data and earnings reports, even though the US January employment reports perplexed markets on Friday. President Mubarak's dramatic standoff with protesters in Egypt was in the background all week, pushing crude futures around, and leading to a lot of bets being made on energy stocks. In a rare appearance at the National Press Club in Washington on Thursday, Fed Chairman Bernanke spoke frankly with journalists, warning that the US economy is still in a "deep hole" and offered a trenchant defense of the FOMC's performance in helping the economy escape the Great Recession. The strong January ISM Manufacturing and Chicago Purchasing Managers surveys plus strong quarterly results from Exxon, UPS and Pfizer sent US equity indices higher on Monday and Tuesday. The ISM manufacturing survey hit its highest level since May of 2004, confirming that manufacturing continues to recover in 2011. The ISM manufacturing employment index reached its highest level almost forty years, raising hopes for Friday's January payrolls data. The January ISM non-manufacturing hit its highest level since mid 2005. January Eurozone CPI data came in above the ECB's 2% target, making inflation a key issue in Europe this week; in the US the December PCE numbers were unremarkable, with no sign of growing inflation. In another good sign for the economic recovery, the personal spending component of the PCE data continued to make steady but modest gains. The focus in the back half of the week was on the US January employment reports. Expectations were for a gain of 146K jobs in the non-farm payrolls data on Friday, but the actual figure came in at 36K, an outcome that confused and frustrated market participants. The Labor Department blamed the weather and others pointed at the very sizable 339K plug in the birth-death adjustments (ex birth-death adjustments, the headline non-farm payrolls number would have been about +372K). A lower unemployment rate of 9.0% hardly made the report clearer, and prompted PIMCO's Bill Gross to call the data schizophrenic. Also note that the Labor Department said various changes were made to the underlying data tables, which impacted the results. For the week, the DJIA rose 2.3%, the Nasdaq gained 3% and the S&P500 was up 2.7%.

- Exxon had its best quarter since late 2008, and easily beat top and bottom-line expectations. The company benefitted from renewed strength in crude and a big 19% y/y increase in production during the quarter. Like competitors that reported last week, downstream operations turned a tidy profit after losing money a year ago. Royal Dutch Shell disclosed very substantial y/y gains in profit and revenue, although they still fell short of market expectations. Shell's CEO said he expects OPEC's slack capacity may forestall oil price spikes in 2011. BP missed profit targets in its fourth quarter and also said it would reinstate the quarterly dividend at 50% of the prior rate, as expected. The company has said it is looking to shrink operations in order to help recover from the Gulf oil spill, and to that end it said output would decline by 11% in 2011, after a 9.4% drop in 2010. Refiner Sunoco's earnings beat the consensus view, while revenue was twice the expected amount. Shares of the company declined, however, after executives expressed some reservations about the amount of excess refining capacity available in the industry.

- Old media powerhouse Time Warner slightly exceeded analysts' estimates, authorized a large stock buyback and hiked its dividend. Analysts noted very strong growth in advertising revenue from the company's cable networks, underscoring the rebound for the traditional TV sector. In the semi space, Broadcom met expectations but warned critical segments could see lower revenue in the first quarter, while MEMC missed profit targets but handily outperformed on the top line and offered a very strong FY11 outlook.

- The big health insurance companies reported results this week. Aflac missed both top- and bottom-line targets in its Q4 report and offered a very broad guidance range for FY11, causing investors to duck. Aetna met expectations in its fourth quarter report and offered strong earnings guidance while also warning that revenue would be down slightly on a y/y basis. Cardinal Health modestly topped expectations and raised guidance. In Florida, another federal court ruling this week cast more doubt on the future of the healthcare reform law. The Florida judge ruled that the requirement in the health care reform legislation that all citizens have healthcare is unconstitutional, echoing a ruling issued by a federal judge in Virginia back in December.

- Shares of Visa and MasterCard declined following the credit card firms' tepid quarterly results. Note that MA's margins fell sharply on a sequential basis. Profits at Hartford Financial were very strong, and the company also increased its quarterly dividend. Asset manager Genworth Financial surprised traders with an unexpected quarterly loss, thanks to new mortgage insurance reserves in the face of a weakening housing market.

- UPS beat profits targets in the fourth quarter. The company said its earnings for 2011 would exceed the firm's prior all-time peak on higher average daily volume and expanding margins. Pfizer met expectations in its Q4 report and also announced that it would review operations to streamline the company. Executives said Pfizer would reduce R&D spending and look at the composition of its business portfolio. Archer Daniels Midland's quarterly profit was twice the expected amount in its second quarter, while revenue was way above par. Management was upbeat about the outlook for ethanol in 2011. General Motors reported very strong January sales, signaling that the recovery in the US auto sector is continuing. January sales were up more than 23% y/y, well ahead of market expectations. Ford's January sales rose 13% y/y, in line with December levels.

- Retailers' January same-store sales reports were generally strong enough to sustain the view that consumer spending continues to recover. There were some outstanding comps and a few laggers, but no real surprises. In the apparel sector perennial outperformer Limited Brands crushed expectations with a whopping 24% y/y comp and The Gap turned out a positive comp versus negative estimates. Mall chains were mixed, with recent outperformer Abercrombie slipping into negative comps and Aeropostale reversing recent misses by beating expectations. BJ's and Costco did very well, while Target's comps were disappointing. Department stores showed mixed results, with Dillard's and Stage Stores performing well and JC Penny and Kohl's below par.

- Treasury yields backed up aggressively this week as most of the US data releases fueled optimism that the economic recovery is gathering pace, simultaneously adding to growing market anxiety about inflation. Dealers preparing for $72B in coupon supply scheduled for auction next week also weighed on prices. Rates broke out with the US benchmark 10-year joining the long bond in offering their highest yields since last spring. The 10-year climbed more than 20 basis points for the week to 3.65%. For the first time in a while, short-term rates moved in tandem to the upside. Surging food and energy prices spurred some speculation that central banks in Europe and the US may need to start raising interest rates sooner than previously thought. The US 2-year is back above 0.75% and the Dec fed fund future saw the odds of a 2011 rate hike rise to more than 50% from less than 30%. The ECB, which is generally anticipated to be the first of the major central banks that will tap on the brakes, saw Germany's 2-year shatz yield soar more than 10 basis points briefly reaching 1.5% for the first time since the summer of 2009. Officials were quick to keep expectations in check though, highlighted by Trichet's less than hawkish tone at the ECB press conference and Bernanke's speech affirming confidence the Fed is charting the right course. PIMCO's Bill Gross said that despite the glaring move up in commodity prices the Fed is unlikely to raise rates anytime in the next 12 months.

- The continuing unrest in Egypt kept a cautious tone in FX markets as the week began, although risk appetite heated up in the wake of stronger US and European January PMI data after it became clear that the Suez canal would remain secure for the time being. The euro strengthened on the PMI data, as well as good demand from Middle East and Asia sovereign buyers. Investors were buying euros on reports that the EU was close to striking an agreement to purchase government debt in private placement. Thursday's ECB rate decision reversed sentiment abruptly, as traders zoomed in on the ECB's inflation position. Note that on Monday, the January Eurozone CPI reading came in above the ECB's 2% target for the second consecutive month, putting the ECB in a real bind. Current ECB thinking is that maintaining policy unchanged is best given the fragile recovery and the uncertainty around the peripheral economies, even though inflation remains a real threat to Europe. At the post-decision press conference, Trichet essentially reiterated his statements from January and offered no fresh commentary on inflation levels. Perplexed dealers concluded that the ECB might actually believe inflation risks were broadly balanced, damping prospects for higher interest rates. The ECB's dovish tone saw the euro-related pairs move lower, with EUR/USD dropping rapidly from ten-week highs around 1.3862. After the US employment reports on Friday, EUR/USD fell below 1.3600.

- The peripheral debt crisis remained in the background this week. Hopes were dashed that the Eurogroup might strike some sort of agreement for moving toward a concrete resolution of the crisis when French Finance Minister Lagarde said this week's meeting would only tackle energy issues and told observers to wait for the March EU Summit. S&P downgraded Ireland's sovereign rating by one notch, while a German government source indicated that Germany will oppose proposed plans to purchase government bonds via the EFSF. In addition, there were worries about economic imbalances among Eurozone member states: the overall Eurozone Dec unemployment rate came in at 10%, below expectations, while Spain's Jan unemployment registered at 20.3%.

- Sterling moved towards 1.59 after BoE hawk Weale aired his concerns about inflation over the weekend, justifying his reasoning for a vote to hike interest rate by 25bps. The pound continued to be the beneficiary of Middle-East drama and GBP/USD posted three-month highs above 1.6275. Hawkish comments from MPC members Sentence and Bean also helped. Bean admitted that a rate rise may be necessary. Dealers noted that the recent string of better data might prove that the recent contraction in the UK GDP was a fluke.

- USD/JPY began the week little changed, just above the 82 handle. The Japanese Finance Ministry said that it did not perform any currency intervention between Dec 29th and Jan 27th. Yen strength in the mid-part of the week was due to repatriation flows from redemptions of European bonds, which sent the pair to just above the 81 handle. The move threatened to reignite speculation that the BoJ might be forced to intervene and weaken the currency before rates put pressure on domestic exporters. BoJ's Kamezaki said that the central bank remains vigilant in watching the currency's strength.

- With much of Asia closed for the Lunar New Year, Australia saw an even greater share of global market spotlight this week. The flood-stricken mining state of Queensland continues to recover and economic news from Down Under showed marked improvement. The RBA rate decision was surprisingly more upbeat than expected. The central bank commented that private investment and the trade environment would remain robust, and indicated it would look beyond the near-term impact of the flood in setting monetary policy. Later in the week, the quarterly RBA policy statement saw an upgrade in 2011 GDP to 4.5% from 3.75% and headline CPI to 3.0% from 2.75%. The hawkish outlook and strong economic data (December building approvals rose at its fastest pace in seven months) boosted the Aussie dollar within 10 pips of $1.02 level against USD - a 1-month high - and within 60 pips of a multi-year high above 1.0250.